Nov. 20 -- The yen traded near a 1 1/2-year high against the dollar as credit-market losses caused investors to sell higher-yielding assets funded by loans in Japan.
The currency gained the most versus the Australian dollar and the South Korean won as a decline in Asian stocks eroded confidence in the so-called carry trade. The yen strengthened against the euro on speculation subprime-mortgage losses will erode earnings at companies in Europe, making it harder for the European Central Bank to raise interest rates.
``This will be a good day for the yen,'' said Paul Milton, chief dealer in Sydney at Societe Generale SA, France's third- biggest lender. ``In one word, it was equities, and they came off heavily.''
The yen traded at 109.78 per dollar at 11:34 a.m. in Tokyo from 109.76 late in New York yesterday. It rose to 109.13 per dollar on Nov. 12, the strongest since May 2006, and may advance to 109.30 today, Milton forecast. Japan's currency traded at 160.71 a euro from 160.95 yesterday. The dollar was at $1.4640 per euro from $1.4665.
Japan's currency climbed against 15 of the 16 most-active currencies after Goldman Sachs Group Inc. said in a report that Citigroup Inc., the largest U.S. bank by assets, may write down $15 billion in collateralized debt obligations over the next two quarters.
It rose to 96.30 to the Australian dollar from 97.04 yesterday in New York. The yen climbed to 8.4349 won from 8.3288. The Morgan Stanley Capital International Asia Pacific Index of regional shares fell 2.5 percent.
Regional Stocks
The euro fell against 10 of the world's 16 most-actively traded currencies after Swiss Reinsurance Co. said yesterday it made a 1.2 billion-franc ($1.08 billion) loss related to the collapse of the U.S. subprime-mortgage market.
``Concern over further losses ahead are not all behind us,'' said Sean Callow, senior currency strategist in Singapore at Westpac Banking Corp., Australia's fourth-largest lender. ``The sentiment is that the credit-market story is a problem for both the euro and the dollar.''
The euro may move between $1.4520 and $1.4750 and between 158.70 yen and 164.50 yen this week, Callow forecast. The ECB said in its monthly report published last week it needs more information on the economic impact of rising credit costs before deciding whether to increase borrowing costs again.
Traders held bets the ECB will lift its benchmark rate from 4 percent this year. The implied yield on the Euribor December futures contract was 4.605 percent yesterday.
Carry Trades
The yen has strengthened against all 16 most-traded currencies this month, gaining 11.9 percent versus Australia's dollar and 8.4 percent against New Zealand's.
In carry trades, investors borrow money in low-yielding economies such as Japan and lend the funds in high-yielding countries to profit from the spread. The risk is that currency moves wipe out their earnings.
Japan's benchmark rate is 0.5 percent, the lowest among industrialized nations. The key rate in Australia is 6.75 percent while New Zealand's is 8.25 percent.
One-month implied volatility for the yen rose to 13.60 percent today, from 13.20 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades.
U.S. Housing Starts
Demand for the dollar may weaken as economists forecast a government report today will show U.S. housing starts dropped to a 14-year low in October.
The dollar has lost 10 percent against the euro and 7.8 percent versus the yen this year as two rate cuts by the Federal Reserve dimmed the allure of U.S. assets. It weakened to an all- time low of $1.4752 per euro on Nov. 9.
The yield advantage of U.S. two-year Treasuries over similar-maturity Japanese government debt shrank to 2.41 percentage points, the narrowest since October 2004, making U.S. assets less attractive to international investors.
Today's Commerce Department report will show housing starts fell to an annualized rate of 1.17 million in October, from 1.19 million during September, according to a Bloomberg News survey. The data are due for release at 8:30 a.m. Washington time.
The Fed is scheduled to issue the minutes from its Oct. 31 meeting at 2 p.m. The central bank is also expected to release quarterly forecasts for the economy and inflation.
``The dollar is hard to buy,'' said Motonari Ogawa, vice president for interest-rate products and foreign exchange in Tokyo at Morgan Stanley, the world's second-biggest securities firm. ``The markets are fixated on today's U.S. housing data and FOMC minutes. Overseas investors will actively respond to them.''
The U.S. currency may fall to 109.40 yen today, Ogawa said.
Futures traded on the Chicago Board of Trade show the odds of the U.S. central bank cutting rates a quarter-percentage point to 4.25 percent on Dec. 11 are 96 percent, up from 72 percent a month ago.
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